Archive for May, 2009

This is the title of an op-ed piece, by James Schlesinger and Robert L. Hirsch, which appeared in the Washington Post several weeks ago (http://www.washingtonpost.com/wp-dyn/content/article/2009/04/23/AR2009042303809.html). I have been pondering their words for several weeks now. I believe their main points are correct, but their analysis is incomplete. Of course, an op-ed column is not a manuscript or treatise and not all can be said within the word limit.

In describing our demand for electricity, Schlesinger and Hirsch say, “We expect the lights to go on when we flip a switch, and we do not expect our computers to shut down as nature dictates.” And since the wind does not always blow, the sun does not always shine and storage is still very inefficient, we will continue to use hydrocarbons. In their words:

“The United States will need an array of electric power production options to meet its needs in the years ahead. Solar and wind will have their places, as will other renewables. Realistically, however, solar and wind will probably only provide a modest percentage of future U.S. power. Some serious realism in energy planning is needed, preferably from analysts who are not backing one horse or another.”

It is good to be reminded that we do expect electricity on demand. But this is not the end of the story. Some consumption can be shifted to when the wind does blow and the sun does shine. It can be done through time of day pricing, i.e., peakload pricing. This is hardly a new concept, but the electric industry has always been reluctant to try it. We now have better technology to accomplish this goal through the “smart grid.” Peakload pricing is not Nirvana. It makes it harder to set rates and may create shifting peaks, which requires further rate analysis and correction. It may be a cliche, but a journey of one thousand miles still starts with the first step, and the first step has been delayed by at least a half a century.

Also, leaving the economics aside for a moment, the reason we use coal is that we can stack it up in a big pile (or leave it in railcars) and burn it when we need it. Natural gas molecules are “stacked up” in a pipeline to be used as necessary. So we can have our energy when the sun is not shining and the wind is not blowing.

However, there is no technical reason why we cannot pile up a supply of biomass for the same purpose. Or waste products such as plastic bags. Here the economics does really matter. Although some would argue, probably correctly, that the price of our hydrocarbon fuels does not cover the cost of the negative externalities, they are currently cheaper than the biomass and waste alternatives, which also create negative externalities. These alternative solutions are capable of being transported, stacked up and burned just as is done with coal and natural gas. Reject them on economic grounds if you must, concern yourself with their negative externalities as you should, but do not exclude them from broader consideration as a potential part of the energy equation.

Nuclear power should be considered also. In a broader sense it is “stacked up” and used when we need it. I have seen much written about the spent fuel costs, but almost nothing on the environmental costs of mining uranium, which certainly cannot be zero.

As the authors say, some serious realism is needed. That requires looking at all aspects of energy planning.

I recently attended the AES annual stockholders’ meeting. I should duly note that I am a small shareholder and have been for more than a decade. Nothing I write here will affect my wealth very much, given that I do not own that many shares and AES is not a huge presence in US power markets. Most of its operations are international.

Ned Hall, Executive VP, answered some of my questions on why utilities are not rushing to invest in the smart grid, but are happy to allow the US government to provide funding. If I misquote or otherwise mangle his responses, he or any AES representative is free to respond. I have no transcript of the conversation. I am writing from memory. I am seeking answers, not either promoting or casting blame on power companies.

His first thought was that with the steady rise in energy prices prior to the sharp drop last fall, utilities were looking for ways to cut costs in order to keep sales from falling, rather than increasing their investments and rate bases. I can easily understand this concern. People are in business to sell products, not create barriers to sales.

His second claim was that there is no incentive for utilities to become more efficient, because that might also cause them to lose sales and the public utility commissions did not offer ways to compensate for these losses. I am somewhat skeptical of this answer, especially since many state commissions have offered incentive regulation and demand side management programs for years. Let me break things down into smart grid functions to get a better grip on the problem.

The first function I would mention is the use of the smart grid to improve path efficiency on the grid, discover outages faster and with greater accuracy, reroute electricity along the most efficient path and improve system security. In other words, to increase reliability. This saves the electric company money in the long run, while not affecting demand. If anything, it improves sales, because when electricity does not flow to the customer, it cannot be billed.

Another aspect of the smart grid is time-of-day metering. Half a century ago, Ma Bell and the baby Bells were capable of breaking long distance service into 3 billing periods, with day rates being higher than evening rates, which were in turn higher than late night rates. The company seemed to be able to do this noticeable loss of revenue. Yet the nation’s electric utilities (which were instrumental in the break-up of the phone monopoly when they were allowed to build microwave stations on their own rights-of-way for internal company communications) are not capable of doing this? Granted that separate meters at every location are not necessary for telecommunications billing as they are for electricity useage billing (is there no feasible way to use the smart grid for billing and eliminate meters on the home or business forever?). Current meters may need to be replaced at considerable cost. However, when the telephone monopoly was broken up, new equipment was added to each home and place of business, and this did not bankrupt phone companies.

The third function I would mention is the most problematic for electric companies and I understand why they would want to move slowly or even balk at this use of the smart grid. That is, there are proposals that homeowners and other users of the system be allowed to add electricity to the grid from their renewable sources such as solar, wind and perhaps co-generation. Imagine if Walmart were required to accept products from its customers on demand for it to resell, regardless of supply and demand conditions. Even if the products were made in accordance with specific standards, the coordination problem would be tremendous. So I would expect and even advise a cautious approach here.

I still believe that much of the problem is simply electric company management inertia. I believe many were burned seeking to make big bucks on fiber optic cable along their rights-of-way, but during the era of deregulation, little data were collected on this issue by those willing to make it public. Mergers and other factors decimated white collar employment. Also, if Uncle Sam is providing free money, why not sit back and wait for it like an orchard pig waiting for an apple to drop?

But which public utility commission is going to allow a rate of return on free money? That is my concern for the long run health of the industry.